Significant
events of 1980 affecting the FDIC and the banks it supervised included unprecedented
interest rate levels and fundamental reform of
the banking laws. An increase in federal deposit insurance to $100,000
from $40,000 per depositor was one significant feature of the Depository
Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980,
signed into law on March 31, 1980, by President Jimmy Carter.

*Includes
open bank assistance for First Pennsylvania Bank, N.A., with assets
of $8 billion. Excluding this transaction, the percent change would
be 79.95 percent.Back
to table

Source: FDIC, 1980 Annual Report and Reports from FDIC Division of
Finance and FDIC Division of Research and Statistics.

Notable Events

In addition to the stresses produced by high interest rates,
financial institutions had to cope with the changes created by the passage
of banking deregulation legislation. DIDMCA was the most sweeping banking reform
package enacted since 1933 and began the gradual process of removing the restrictions
that had placed a ceiling on the interest rates banks could offer their depositors.
It sought to deregulate banking and promote more competition to benefit consumers;
it also liberalized lending powers of federal thrifts and preempted some state
usury laws.

Economic/Banking Conditions

The
U.S. economy showed broad-based weakness in 1980. The growth in Gross Domestic
Product (GDP) declined, interest rates
rose as did inflation, and job growth was meager. Growth in real GDP was sluggish
for the second consecutive year, declining almost 0.3 percent after 1979’s
slow but moderate 2.9 percent growth.3-2The
nation’s unemployment rate
jumped to 7.2 percent from 5.8 percent in 1979.3-3Real
estate markets showed mixed signs. Home sales were down 22 percent and housing
starts were also down
26 percent from the previous year.3-4On
the other hand, office markets remained tight, with the national office vacancy
rate at a stable and very low 4.9 percent.3-5 The
deterioration in the residential sector was due in part to steadily rising
interest rates. The discount rate rose to 11.8 percent, and the 30-year mortgage
rate was up to 13.8 percent.3-6

Some regions of the country were
experiencing better economic times than the rest. California’s economic
expansion was above the national average at 1.7 percent Gross State Product
growth,3-7in
part due to the solid performance of the defense-related industry in southern
California. The growth was also
a result of the high number of primary government contracts in that part of
the state. Low commercial vacancy rates sparked rapid growth in the real estate
market.3-8Commercial
and Industrial (C&I) loans rose slightly from 17.6
percent of bank assets in 1979 to 17.9 percent in 1980 and were well above
the national median of 9.6 percent; southern California had the highest levels
in the nation at 20.6 percent of bank assets. California was, in fact, the
only state to surpass the country’s median in all loan categories as
a percent of bank assets. The state’s gross loans and leases were 60.4
percent, total real estate loans were 17.2 percent, commercial real estate
loans were about 8 percent, and C&I loans were 17.9 percent.

The Southwest region’s C&I loans also increased, to 13.2 percent
of bank assets, above the national median of 9.6 percent, while the region’s
total real estate loans at 12 percent of assets fell well below the national
median of 18.1 percent. The region’s farm sector growth continued from
the 1970s. Farm production, farm prices, and agricultural exports were all
increasing in the 1970s, and those factors were boosting the local economy.3-9 As
the 1980s began, U.S. farmland exports exceeded $40 billion, farm prices had
nearly doubled since 1970, and farmland value per acre had increased by
220 percent since 1975. Agricultural lending had also increased by 359 percent
since 1970, to a total farm debt level of $178.8 billion.3-10

Adding to the economic growth was the strong demand for oil around the world
with OPEC restrictions causing oil prices to rise. That, in turn, sparked an
increase in demand for oil rigs and drilling in the Southwest.3-11There
was a great deal of lending in those two industries based on the belief that
they
would continue to be profitable and prices would continue to rise.

Nationally, there were 220 newly
chartered banks. The Office of the Comptroller of the Currency (OCC) believed
that new charters would increase bank competition.
The industry saw a shift to commercial real estate loans, especially in the
Southwest and California. That trend is noteworthy, as commercial real estate
loans tend to be riskier than C&I loans, due to the boom and bust nature
of real estate markets.

Geographic and product limitations on banks and thrifts kept the U.S. depository
institution industry diffused and segmented. At the end of 1980, there were
14,434 commercial banks with total assets of $1,855.7 billion; 4,005 savings
and loan associations with assets of $620.6 billion; 323 mutual savings banks
with assets of $153.6 billion; and 21,467 credit unions with assets of $69
billion. Thus, at the beginning of the turbulent 1980s, the U.S. had more than
40,000 state or federally chartered depository institutions that together controlled
approximately 60 percent of total financial assets. The remaining 40 percent
were controlled by insurance companies, pension funds, securities brokers and
dealers, money market funds, finance companies, and other financial firms.

Deposit insurance continued to provide needed protection for consumers and
small depositors. Large depositors and other bank creditors perceived that
their funds were only minimally at risk, if at all, because most bank failures
resulted in mergers in which all depositors were protected against loss. As
rates were deregulated, depositors began to place their money in those banks
and thrifts that were paying the highest rates, without regard to the management
or financial stability of the institutions.

As part of its monitoring system,
the FDIC maintained a list of problem banks. Banks were rated under the Uniform
Financial Institutions Rating System, also
known as the CAMEL system, which rated the Capital, Assets, Management, Earnings,
and Liquidity of banks as they were examined. Each component was assigned a
number from “1” to “5,” with “5” being
the worst. The bank then received a composite rating from “1” to “5,” with “5” again
being the worst. Banks with a composite rating of “4” or “5” were
placed on the problem bank list. The number of banks on the list, which had
reached 485 in November of 1976, declined steadily and was 217 at the end of
1980, representing about 1.5 percent of insured commercial banks.

Table 3-2 compares the number and total assets of FDIC insured institutions,
as well as their profitability as of the end of 1979 and 1980.

Table 3.2

Open
Financial Institutions Insured by FDIC
($ in Billions)

Commercial Banks - FDIC
Regulated

Item

1979

1980

Percent
Change

Number

14,364

14,434

0.49%

Total
Assets

$1,691.8

$1,855.7

9.69%

Return
on Assets

0.80%

0.79%

-1.25%

Return
on Equity

13.91%

13.68%

-1.65

Savings Banks – FDIC
Regulated

Item

1990

1991

Percent
Change

Number

324

323

-0.31%

Total Assets

$147.1

$152.6

3.74%

Return on Assets

0.45%

-0.17%

--

Return on Equity

6.69%

-2.59%

--

Savings
Associations – FHLBB Regulated

Item

1990

1991

Percent
Change

Number

4,039

4,005

-0.84%

Total Assets

$568.1

$620.6

9.24%

Return on Assets

0.67%

0.13%

-80.60%

Return on Equity

12.12%

2.45%

-79.79%

Percent change is not provided if either the latest period or the
year-ago period contains a negative number.

Source: Reports from FDIC Division of Research and Statistics.

Bank Failures and Assistance to
Open Banks

In the early 1980s, the FDIC relied on two basic methods to resolve
failing banks: the purchase and assumption
(P&A) transaction and the deposit payoff. When determining the appropriate
method for resolving bank failures, the FDIC considered a variety of policy
issues and objectives. Four primary issues were (1) to maintain public confidence
and stability in the U.S. banking system, (2) to encourage market discipline
to prevent excessive risk-taking, (3) to resolve failed banks in a cost-effective
manner, and (4) to be equitable and consistent in employing resolution methods.3-12

Another resolution method that was
beginning to be used more and more was open bank assistance (OBA). The Federal
Deposit Insurance Act of 1950 included
an OBA provision, granting the FDIC the authority to provide assistance, through
loans or the purchase of assets, to prevent the failure of an insured bank.
The FDIC’s authority to provide OBA was expanded by the Garn-St Germain
Depository Institutions Act of 1982, which eliminated certain prohibitive features
of the former Act. Figure 3-1 provides specific information on each type of
resolution method.

A
Purchase and Assumption Agreement (P&A) was an agreement in which the acquirer purchased some or all
of the assets of a failed bank and assumed some or all of the liabilities,
including all insured deposits. As part of the P&A transaction,
the acquiring institution usually paid a premium for the assumed deposits,
decreasing the total resolution cost. Traditionally, the FDIC preferred
a P&A transaction to a deposit payoff, as it was less disruptive
to the community.

In a Deposit Payoff (also known as Payoff), as soon as the bank
was closed by the chartering authority, FDIC was appointed
the receiver and all insured depositors were paid the full amount
of their claims.
Uninsured depositors and other general creditors of the bank
usually did not receive either immediate or full reimbursement
on their
claims; instead, they obtained receivership certificates which
entitled their holders to a proportionate share of the net collections
on
the failed bank ’s assets.

With Open Bank Assistance (OBA), the FDIC was allowed to directly
assist an operating insured bank if the bank was in danger of
closing and its continued operation was essential to maintain adequate
banking
services in the community. The FDIC could make loans to, purchase
the assets of, or place deposits in the troubled bank. Under
normal circumstances, banks were expected to repay the assistance
loans.

In 1980, ten
commercial banks failed; three of those were in Kansas. One
bank received open
bank assistance. The ten insured banks that failed
had deposits of $219.9 million. In seven cases involving banks
holding deposits of $202.7 million, the FDIC arranged a P&A
transaction where a healthy bank, either new or existing, purchased
selected
assets of the failed bank and assumed its deposits. In three
bank failures with aggregate deposits of $17.2 million, the
FDIC paid
off depositors
up to the statutory limit ($40,000 prior to March 31, 1980, and
$100,000 after that date).

On April 28, 1980, the FDIC, the Federal Reserve, and the OCC
jointly announced a $500 million open bank assistance package to
assure the
viability and continued operation of First Pennsylvania Bank,
N.A., (First Penn), a subsidiary of First Pennsylvania Corporation,
Philadelphia,
Pennsylvania. First Penn, with assets of $8 billion, was Philadelphia’s
largest bank and the twenty-third largest in the nation. The
assistance to First Penn was in the form of $500 million in five-year
subordinated
notes supplemented by a $1 billion bank line of credit through
access to the Federal Reserve discount window.

A recent estimate of losses per transaction type is shown in Table
3-3.

Table 3-3

1980
Losses by Transaction Type ($ in Millions)

Transaction
Type

Number of
Transactions

Total Assets

Losses

Losses as a
Percent of Assets

OBA 1

1

$7,953.0

$0

0.00%

P&As

7

221.9

28.4

12.80%

Payoffs

3

17.5

2.3

13.14%

Totals

11

$8,192.4

$30.7

0.37%

Source: Reports from FDIC Division of Research and Statistics.

Payments to Depositors and Other Creditors

The ten banks that failed
in 1980 had total deposits of $219.9 million in 78,398 deposit accounts. Of
those ten banks, the three payoffs represented 5,510 deposit accounts and $17.2
million in deposits. The assisted bank, First Penn, had deposits of $5 billion.

Since the inception of the FDIC on January 1, 1934, until December 31, 1980,
568 insured banks3-13 were
closed, with 3.9 million deposit accounts and total deposits of $6.2 billion.
In meeting its responsibilities, the FDIC as insurer
disbursed $5.7 billion, and as liquidator recovered $5.4 billion. The result
was a net loss to the FDIC of $300 million since it began operations.

Of the 568 insured bank failures, 310 were deposit payoffs. While recoveries
of uninsured portions of deposits varied, in the aggregate, 97.3 percent of
total deposits in payoffs had been paid or made available as of the end of
1980.

Asset Disposition

At the beginning of 1980, the FDIC had $1.9 billion in
assets from failed banks. The FDIC liquidated a little more than it acquired,
ending the year with total failed bank assets with a book value of $1.8 billion.
Those assets had an estimated recovery value of about $710 million.

At the end of 1980, there were 70,968 assets to be liquidated. The FDIC had
liquidation offices in 25 states, the U.S. Virgin Islands, and Puerto Rico
and handled a total of 88 active bank receiverships. Of those, five receiverships
were handled from the Washington office, and 83 were handled from the 50 field
liquidation offices.

In disposing of assets retained
from failed banks, the FDIC converted the assets to cash as quickly as practical
and strived to realize maximum recovery.
With the recoveries, the FDIC first repaid the insurance fund the cash that
had been advanced for the administrative costs. Remaining recoveries were distributed
to the claimants of the receivership based on the priorities contemplated under
the National Bank Act of 1864. Although the National Bank Act did not explicitly
state the claims priorities, the FDIC interpreted the payment order to be as
follows: 1) administrative expenses of the receiver, 2) deposit liabilities
and general creditor claims, 3) subordinated debt claims, 4) federal income
taxes, and 5) stockholder claims. Some states developed their own priorities
which were different from the national law and the FDIC followed the state
laws for state chartered institutions. In 1993, the National Depositor Preference
Amendment was enacted which set the priorities for all state and federally
chartered institutions. The National Depositor Preference Amendment is discussed
later in Chapter 16—1993.

The FDIC adopted a workout strategy for dealing with acquired nonperforming
loans. That strategy usually involved assigning delinquent loans to specific
account officers, who would be responsible for negotiating repayment or settlement
of the debts with borrowers. Frequently, litigation, foreclosure, and the sale
of available collateral were necessary to achieve final debt resolution. That
strategy was typical of the approach used by private and public entities in
handling delinquent paper. Performing loans were warehoused and routinely serviced
until final payoff by the borrower.

The deposit insurance fund grew in 1980 by
$1.2 billion to $11 billion, the largest in
an uninterrupted series of annual increases since 1935. The fund’s
strength was derived from a high degree of liquidity in its assets,
92 percent of which were U.S. Treasury securities. At the end of
1980, the FDIC had 3,644 total staff, compared to 3,598 at the
end of 1979, an increase of 46. The Division of Liquidation staff
3- increased from 432 at the end of 1979 to 460, and the Division
of Bank Supervision staff increased slightly from 2,540 at the
end of 1979 to 2,544. Chart 3-2 shows the staffing levels for the
past twenty years.

3-1 The tables and charts
throughout this book are shown for ease of comparison. They are formatted
the same way in every chapter. Refer to the Appendix for a guide
that includes definitions of terms used in the tables and charts. Back
to text

3-12 This figure
does not include open bank assistance transactions. The FDIC did not
begin including assistance agreements with the failures for reporting
purposes until 1981. Five assistance agreements, with total deposits
of $6.8 billion, including First Penn, should be included in the overall
totals. Back to
text

3-13 Liquidation
staff does not include support personnel from other FDIC divisions,
such as the Legal Division and the Division of Accounting and Corporate
Services (later the Division of Finance), who also were working on
liquidation matters. Back to
text